What investors should know about the Santa Claus rally

Derek, what is the Santa Claus rally? During this festive time of year we experience bright lights decorating our city, stockings hung with care, holiday music on the radio, and of course the Santa Claus rally.

Derek, what is the Santa Claus rally?

During this festive time of year we experience bright lights decorating our city, stockings hung with care, holiday music on the radio, and of course the Santa Claus rally.

While most of these are familiar, the Santa Claus rally isn’t necessarily a familiar holiday discussion in your house (although it is in mine). As most things go during this time of year, there is also some tradition and lore involved with the Santa Claus rally.

So what is it?

The Santa Claus rally doesn’t have to do with an annual car race with men dressed in red and white suits (although I’m sure that could also be a tradition somewhere if you went looking for it). In fact, the Santa Claus rally has to do with a belief, or a theory, that the stock market moves up notably as we head into the end of the year.

Just like any good holiday story, there is some inkling of truth to this one.

The true definition of the Santa Claus rally is an increasing period in the stock market involving the last five trading days of the year and the first two of the new year. This was a phenomenon written about by Yale Hirsch and was called the “December effect.”

One of the concepts at work is that investors are actively selling their losing investments heading into the end of the year to create losses for tax purposes.

On the flip-side, investors are not willing to sell their winning investments until January so as not to create a gain in this calendar year.

While all of this might seem to be a lot of work, the concept is that investors want to push out their tax obligation by nearly an entire year, and they can do this if they hang onto their winners until January.

With this in mind, there isn’t much point in selling a winner during the last few days of the year. The other side of this is that there is benefit in selling your losers because you may be able to use that tax loss immediately.

So putting it all together, since no one is selling their winners, the value in those stocks tend to rise going into the end of the year.

The losers may continue to decline as added selling pressure mounts. It could also be that Wall Street and Bay Street are feeling the effects of good cheer heading in to the end of the year.

So what happens when we get into January?

You guessed it, there is another phenomenon called the January effect. In direct comparison, investors who waited to sell their winners now begin to sell shortly after they sing Auld Lang Syne and welcome in the new year of trading. All of this selling pushes the value of the winners lower.

Meanwhile, the losers from January are looking attractive because of all the selling pressure going into the end of the year, and as such investors begin piling back into these names, thus increasing their value. Specifically, small company stocks seem to benefit more as we get into January.

Now with all this talk about the calendar and timing your investments, one needs to step back and understand whether any of this actually works.

The reality is that tax-loss selling certainly does occur and it can be a valuable strategy. How it impacts the market isn’t always notable and certainly impossible to predict.

The truth is that sometimes there is a Santa Claus rally, and sometimes there is not. Sometimes stocks move higher in January, and sometimes they do not.

To add to the Santa Claus rally, there are a number of market hypothesis to follow, including the old adage, “Sell in May and go away,” as well as the observation that markets “always” move lower in September.

Whatever each theory states, the reality is that various times of the year have varying degrees of impact on the markets.

The problem is that they are impossible to predict to any degree of certainty.

So what does the average investor do? My opinion is tax-loss selling is a valid strategy that needs to be discussed further. With that in mind, if you’re a long-term investor focused on the future you should ignore the Santa Claus rally and focus instead of spending time with friends and family, and that the only red or green you should be concerned about are the lights outside your house.

From my family to yours: season’s greetings and all the best in 2015.

Wealth Watch is written by Derek

Fuchs, a wealth advisor with ScotiaMcLeod in Red Deer. It is provided for informational purposes only. Readers are urged to consult a wealth advisor for help with their personal investment circumstances. Fuchs can be contacted at derek.fuchs@scotiamcleod.com.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Bryson, six, and Mara, eight, play with puppies from Dogs With Wings Saturday. (Photo by Sean McIntosh/Advocate staff)
Dogs With Wings introduces Red Deer program

A program that trains puppies to be certified service, autism, facility and… Continue reading

Alberta’s Chief Medical Officer of Health Dr. Deena Hinshaw says the greater lag time between first and second doses will allow more Albertans to be effectively vaccinated sooner. (File photo)
Alberta extends time between vaccine doses means more people to get shot sooner

National Advisory Committee on Immunization says doses can be to up to four months apart

People watch the sun set in the Red Sea port city of Jiddah, Saudi Arabia, Monday, Jan. 18, 2021. (AP Photo/Amr Nabil)
OPEC cartel, allies face decision on increasing oil output

OPEC Plus made deep cuts in output in 2020 to stave off a collapse in prices

The Twitter Canada office in Toronto is shown in this undated handout photo. Twitter Inc. will be bulking up on Canadian talent this year with a hiring spree meant to add dozens of engineers in the country to its staff. The San Francisco, Calif.-based social media giant said Thursday that it plans to form its first Canadian engineering hub with at least 24 new workers it will soon hire. THE CANADIAN PRESS/HO - Twitter Canada
Twitter to launch engineering hub in Canada with dozens of hires this year

Twitter says technical talent has been evolving in the Canada recently

Jim Lowes, a living kidney donor who was inspired by Humboldt Broncos bus crash victim Logan Boulet, is photographed at his home in Burlington, Ont., on Thursday, Feb. 25, 2021. Green Shirt Day, April 7, was started after the crash that killed 16 people and coincides with the anniversary of Logan Boulet’s death. Boulet’s family donated his organs after the crash. THE CANADIAN PRESS/Peter Power
Three years after Broncos bus crash, Logan Boulet still inspiring organ donation

Nearly 147,000 Canadians registered to be donors in two months

FILE - In this Feb. 23, 2021, file photo, a vehicle rests on its side after a rollover accident involving golfer Tiger Woods in the Rancho Palos Verdes suburb of Los Angeles. Detectives are looking at data from the so-called “black box” of Tiger Woods’ SUV to get a clearer picture of what occurred during the Southern California rollover crash last week that seriously injured the golf star, authorities said Wednesday, March 3. (AP Photo/Marcio Jose Sanchez, File)
Detectives look at SUV’s ‘black box’ from Tiger Woods crash

California law allows law enforcement to seek search warrants for data recorders

FILE - In this Jan. 30, 2019 file photo, Alex Kurtzman, from left, Heather Kadin, Anson Mount, Sonequa Martin-Green and Ethan Peck participate in the “Star Trek: Discovery” show panel during the CBS All Access presentation at the Television Critics Association Winter Press Tour at The Langham Huntington in Pasadena, Calif. Paramount+ debuts Thursday, March 4, 2021 as the latest — and last — streaming option from a major media company, this time from ViacomCBS. The company hopes its smorgasbord of offerings — live sports and news, reboots of its properties like “Frasier” and “Rugrats,” original shows like “Star Trek: Discovery” and the ViacomCBS library will entice viewers(Photo by Willy Sanjuan/Invision/AP, File)
Will Paramount+ be a mountain or a molehill in streaming?

Over the last year and a half more and more streaming services have debuted

Red Deer Regional Hospital Centre can accommodate up to 20 patients requiring a ventilator, says Alberta Health Services.  File photo by Advocate staff
Opinion: UCP government reneging on Red Deer hospital funding

Another year, another Alberta budget and another blow to central Albertans. Budget… Continue reading

Seattle Storm guards Sue Bird, right, and Jordin Canada pose for photos Wednesday, March 3, 2021, on the roof of the Space Needle in Seattle after they raised a flag with the team's new logo on it. Bird re-signed with the Storm earlier in the week. (AP Photo/Ted S. Warren)
Sue Bird staying busy with 20th Seattle season on horizon

Sue Bird staying busy with 20th Seattle season on horizon

Lille players celebrate after Jonathan David scored his side's second goal during the French League One soccer match between Lille and Marseille at the Stade Pierre Mauroy stadium in Villeneuve-d'Ascq, France, Wednesday, March 3, 2021. (AP Photo/Michel Spingler)
David scores 2 as Lille wins to stay two points clear of PSG

David scores 2 as Lille wins to stay two points clear of PSG

Canada defender Shelina Zadorsky, right, passes the ball in front of Argentina forward Sole Jaimes (9) during the second half of a SheBelieves Cup women's soccer match, Sunday, Feb. 21, 2021, in Orlando, Fla. Alphonso Davies and Shelina Zadorsky have been named Canada Soccer’s players of the month for February. THE CANADIAN PRESS/AP, Phelan M. Ebenhack
Davies, Zadorsky named Canada Soccer’s players of the month for February

Davies, Zadorsky named Canada Soccer’s players of the month for February

Most Read